Deficit possible if crisis worsens

Treasury signalled the government should be prepared to abandon its promised budget surplus if the European debt crisis triggers a global recession as business leaders ex­pressed concerns Australia had squandered the economic benefits of the resources boom.

Martin Parkinson
, the Treasury secretary, said the government’s budget position was “incredibly healthy" compared with the rest of the world, the nation’s banks had become more resilient and the Reserve Bank had room to cut interest rates further.

“The real message is: Australia is not caught up in this," he told a Senate committee in Canberra.

But the situation in Europe had deteriorated from late last year despite bank restructurings, the renegotiation of Greece’s debts and repeated injections of cash, he said.

Australian policymakers would only need to react if there was a “clogging of the financial system" and a global recession, he said.

If that happened: “It’s a different world – all bets are off."

The government could use so-called automatic stabilisers and “go back into deficit to support activity".

Michael Chaney
, the chairman of
National Australia Bank
and
Woodside Petroleum
, said he was very concerned about the global economy and the risk that Europe could fall into a “real unravelling that will reverberate around the world".

Related Quotes

Company Profile

While Australia had the capacity to stimulate growth by going back into deficit and cutting interest rates, “it does seem to me with hindsight a great shame – a great pity – that during this great commodities boom, we never ended up in surplus", he said.

That would mean looking back and saying: “We really didn’t make the most of that."

The government’s top economic priority this year has been to deliver a slim budget surplus in 2012-13. But an economic downturn could cut revenue and automatically force up spending on unemployment and other benefits, blowing out the budget unless the government took corrective action.

Australian business investment jumped 6.1 per cent in the first quarter, rebounding from its first decline in almost two years, the Australian Bureau of Statistics said.

Most of that was driven by a 14 per cent surge in spending by the mining industry. Outlays by manufacturers dropped 1.5 per cent and services by 1.3 per cent.

Investment expectations for the current year were reduced 3.9 per cent, or $6.3 billion, the biggest downgrade for an equivalent period on record, according to CommSec.

“The era of new conservatism certainly doesn’t reside just with consumers – businesses are also hesitant to spend," said CommSec economist Savanth Sebastian.

Separate data showed building approvals unexpectedly fell 8.7 per cent in April, led by a 12 per cent plunge in clearances for detached dwellings, according to the ABS.

“Of great concern is the clear evidence that the non-mining economy has lost more momentum of late, and is much weaker than expected," said UBS economist Scott Haslem.

With consumer confidence all but unmoved by last month’s unexpected half a percentage point interest rate cut by the Reserve Bank, speculation intensified that more rate reductions are likely in coming weeks.

Westpac chief economist
Bill Evans
– alone last year in tipping the start of rate cuts – changed his forecast for next week’s rate meeting to a cut from no change, as did National Australia Bank.

Mr Evans said the change was based on an assessment that the situation in Europe had worsened.

“This deterioration is expected to have a more severe impact on confidence in Australia than had earlier been expected," he said.

The mining industry called on the government to end its class-warfare rhetoric, stop demonising the industry and help address concerns about rising costs.

Prime Minister
Julia Gillard
told guests at a Minerals Council dinner on Wednesday “you don’t own the minerals" and ordinary Australians deserved a share of the boom.

Treasury’s Dr Parkinson said that while Europe had deteriorated again, if Greece exited the euro it would not “really require much response from us".

“In that environment, our fiscal position is incredibly healthy vis a vis the rest of the world," he said.

When asked by Liberal senator
Mathias Cormann
whether Treasury had been planning for a Greek exit, Dr Parkinson told the hearing: “Yes, of course we’ve been thinking about what might happen in Europe and what the options might be for Australia to respond in the event that things deteriorate."

Economists are concerned the Greek economy would go into shock if it abandoned the euro, hitting the broader European economy and hurting demand for goods and services produced across the rest of the world, including China.

Mr Chaney said the world was in a “fragile state and Australia continues to be in good shape because of the strength of growth in China".

“If that stalls, then I think Australia will find it much harder," he said.

Dr Parkinson noted that Australia’s net debt to gross domestic product ratio is at present forecast to peak at under 10 per cent, far below most developed economies.

Economists say the government has a lot of flexibility to spend more – it has forecast a surplus of around $1.5 billion next financial year.

Dr Parkinson said a key question, “the one no one quite knows the answer to", was what Greece’s exit from the euro might mean for perceptions of the financial stability of Spain, Italy, Portugal and others.

Treasury secretary Martin Parkinson says Australia would have the capacity to respond to any potential renewed global credit crisis or recession triggered by Europe, including returning to larger deficits.

Mr Parkinson said Australia’s net debt-to-GDP ratio is currently forecast to peak at under 10 per cent.

“We could, if necessary, go back into deficit to support activity," he said in response to a question from opposition senators asking whether Australia’s position would weaker than it was prior to the 2008 crisis.

Mr Parkinson, who sits on the board of the Reserve Bank of Australia, also said Australia still had “quite a lot of capacity on monetary policy."

The secretary told the committee that the situation in Europe had deteriorated again but said that a potential exit by Greece from the euro would not “really require much response from us."

Australian policy makers would only need to react with fiscal policy and other measures if there was a “clogging of the financial system" and a global recession, he said.

If that happens, “it’s a different world – all bets are off," he said. “In that environment our fiscal position is incredibly healthy vis a vis the rest of the world."

“The real message is: Australia is not caught up in this," he said.

“I don’t want to leave anyone with any impression that there are risks in Australia, but equally, if things deteriorated dramatically there would be no way we’d be immune."

Mr Parkinson said turmoil in global financial markets was being driven by a “loss of confidence in the ability of the political classes to reach a resolution" in Europe.

“It’s a sense that things have spiralled out of control of the political classes," he said.

He said Europe is being challenged to find solutions because of the range of problems they face.

“Put simply they have a combination of a lack of competitiveness, combined with fiscal policies that weren’t consistent with that competitiveness," he said.

“All these countries, the euro zone countries, are in a situation where they’re in a world with a fixed exchanged rate and common monetary policy arrangements."

They are “more like states in a federal system, but unlike a fully federated system like the US or Australia they don’t have" a system of transfer payments, he said.

“A series of problems have emerged in different countries, essentially flowing in part out of the aftermath of the financial crisis, and financial markets have lost confidence in the ability of the political classes to reach a resolution," he said.

Mr Parkinson said a key question, “the one no one quite knows the answer to," is what a Greek exit might mean about perceptions about Spain, Italy, Portugal and others.

“And does that lead to an increased likelihood that they come under pressure?" he said.

“If they do, what is their capacity to resist and what is Europe’s capacity to resist?

“That’s why markets are so skittish. It’s not a technical economic issue; it’s an issue of political will."

Treasury secretary Martin Parkinson said Australia would have the capacity to respond to any potential renewed global credit crisis or recession triggered by Europe, including by returning to larger deficits.

Mr Parkinson said Australia’s net debt-to-GDP ratio is currently forecast to peak at under 10 per cent.

“We could, if necessary, go back into deficit to support activity," he said in response to questions from opposition senators asking whether Australia’s position would be weaker than it was prior to the 2008 crisis.

Mr Parkinson, who sits on the board of the Reserve Bank of Australia, also said Australia still had “quite a lot of capacity on monetary policy."

The secretary said the situation in Europe had deteriorated again but noted that a potential exit by Greece from the euro would not “really require much response from us."

Australian policy makers would only need to react with fiscal policy and other measures if there was a “clogging of the financial system" or a global recession, he said.

If that happens, “it’s a different world – all bets are off," he said. “In that environment our fiscal position is incredibly healthy vis-a-vis the rest of the world."

“The real message is: Australia is not caught up in this," he said.

“I don’t want to leave anyone with any impression that there are risks in Australia, but equally, if things deteriorated dramatically there would be no way we’d be immune."

Mr Parkinson said turmoil in global financial markets was being driven by a “loss of confidence in the ability of the political classes to reach a resolution" in Europe.

He said a key question, “the one no one quite knows the answer to," is what a Greek exit would mean about perceptions about Spain, Italy, Portugal and others.

“And does that lead to an increased likelihood that they come under pressure?" he said.

“If they do, what is their capacity to resist and what is Europe’s capacity to resist?"

Parkinson said Treasury was about to start a review of the way it makes forecasts amid criticism the department overestimated the economy’s rebound from the global financial crisis.

The department engaged in similar exercises in 1996 and 2005, and would shortly begin a “review of our forecasting performance and methodologies," Mr Parkinson said.

“We’re setting the terms of reference and the review will be overseen by an independent reference group and we’re in the process of settling membership," he said.